Home » Articles » What should I know about Colorado Senate Bill 181 and its effect on oil and gas development in the state?  Part II

What should I know about Colorado Senate Bill 181 and its effect on oil and gas development in the state?  Part II

Updated:  Sept. 9, 2019.

Part II: Changes to Forced Pooling and Newly Required Rules Build Barriers to New Development.

Part I of this article discussed SB 181’s realignment of the COGCC and its delegation of surface impact regulation to Local Governments. To date, many Local Governments across the Front Range are pressing pause to reassess their own regulations, while others are acting quickly to mold their new regulatory authority to meet the public opinions of their own constituents. Part II of this article contemplates how SB 181’s modifies the forced pooling process and requirement for new COGCC public health and safety rules may practically serve to impede new oil and gas development in the State of Colorado.

1. SB 181 restricts and clarifies Colorado’s forced pooling process.

A. Discussion

Colorado law provides the COGCC with the authority to involuntarily pool mineral interests to prevent waste, prevent the drilling of unnecessary wells, and to protect correlative rights. Such a process is known colloquially as forced pooling. You can read more about Colorado’s forced pooling process here.

On the front end, SB 181 requires that, prior to applying for a pooling hearing, an operator, after tendering a good faith offer to lease at least 60 days prior to any hearing, must own, or secure the consent of the owners of, more than 45% of the mineral interests to be pooled and submit to the applicable local government, an application for the siting of the proposed well location. On the back end, all pooling orders must comply with the COGCC’s new directive and the operator cannot locate any subject well on a force-pooled owner’s surface. After the well is drilled and enters production, force-pooled owners are now entitled to receive a 13% royalty on gas wells and a 16% royalty on oil wells, increased from a blanket 12.5%.

B. Implication

COGCC Rule 509, which remains unchanged as of this writing, permits a person to protest a statutory pooling application if that person would be directly and adversely affected or aggrieved by the pooling order. Based on personal observations, the majority of pre-SB 181 statutory pooling applications go uncontested by the public (or initial protests from the public are quickly withdrawn). While the initial 45% threshold may reduce the number of overall forced pooling applications, it’s unclear what affect, if any, SB 181’s modifications to the forced pooling process will have on the volume of contested pooling hearings. Given that every pooling order is subject to the COGCC’s new directive, it’s reasonable to speculate that the percentage of contested hearings will increase, even if the total number of forced pooling applications decreases. If you are interested in filing a protest to a forced pooling application, then contact Zachary Grey to learn more.

2. SB 181 requires the COGCC to promulgate new rules.

A. Discussion

SB 181 requires the COGCC to draft and pass new rules concerning four topics:

  • Protection and minimization of adverse impacts to public health, safety, and welfare;
  • Alternative well location analysis process;
  • Cumulative impacts of oil and gas development; and
  • Flowlines and inactive wells.

Until such a time as the COGCC issues the new rules contemplated above, the COGCC Director may, but is not required to, delay the issuance of oil and gas permits if the Director determines, “pursuant to objective criteria… that the permit requires additional analysis to ensure the protection of public health, safety, [and] welfare…”[1] To date, the Director has published a list of sixteen objective criteria and any well permit meeting any one of the criteria is subject to additional COGCC analysis.

B. Implication.

Using the objective criteria as his guide, the Director is sorting permits to drill new wells into two groups: (1) Those permits that do not meet any of the objective criteria, and therefore may proceed as usual; and (2) those permits that meet at least one of the objective criteria and are subject to additional analysis. The extra work of sorting and analyzing may slow down an already inundated COGCC staff, resulting in a short-term slow down of permit approval, and consequently, new oil and gas production. The COGCC has commenced efforts to draft the new required rules, but early standstills suggest it faces a long and arduous road toward business as usual.

3. SUMMARY

Critics argue SB 181 is an assault on the Colorado oil and gas industry that will negatively impact the state’s economy. To be sure, SB 181 has implemented state-wide change that places an increased emphasis on the protection of public health, safety, welfare, and the environment. It undoubtedly provides local governments with the autonomy to regulate oil and gas surface developments within their respective boundaries. By the same token, industry-friendly governments need not regulate beyond the COGCC’s scheme and could perhaps even take action in an attempt to streamline and accelerate the permitting process. While individual opinions differ on whether SB 181’s changes to the Act make for sound policy, only time will tell if the oil and gas operators will play by the new rules or break down their rigs for less-restrictive pastures.

Please contact Zac Grey for questions on SB 181, oil and gas in general, or to arrange a speaking engagement on this topic.

[1] C.R.S. §34-60-106(1)(f)(III)(A).

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